UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
-------- --------
Commission File Number 0 - 9676
FIRST COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
ARKANSAS 71-0540166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 WEST CAPITOL AVENUE, LITTLE ROCK, ARKANSAS 72201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501)371-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
Class Outstanding at Sept. 30, 1996
--------------------------------------- -----------------------------
Common Stock, $3.00 par value per share 28,546,948
TABLE OF CONTENTS
Item Page
---- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements (Unaudited)............................. 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 10
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K............................. 21
Signatures............................................................. 22
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED BALANCE SHEETS September 30, December 31,
(Dollars in thousands, except par value) -------------- --------------
1996 1995
-------------- --------------
ASSETS
Cash and due from banks................................................... $ 330,079 $ 432,117
Federal funds sold........................................................ 85,327 108,181
-------------- --------------
Total cash and cash equivalents.......................................... 415,406 540,298
Investment securities held-to-maturity, estimated market
value $333,118 ($352,492 in 1995)........................................ 334,790 351,415
Investment securities available-for-sale.................................. 1,006,278 973,129
Trading account securities................................................ 307 449
Loans and leases, net of unearned income.................................. 3,263,267 3,215,562
Allowance for possible loan and lease losses.............................. (52,144) (51,341)
-------------- --------------
Net loans and leases..................................................... 3,211,123 3,164,221
Bank premises and equipment, net.......................................... 103,259 106,665
Other real estate owned, net of allow for poss losses of $77 ($50 in 1995) 2,100 2,266
Other assets.............................................................. 231,291 222,497
-------------- --------------
Total assets........................................................... $ 5,304,554 $ 5,360,940
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing transaction accounts................................. $ 926,978 $ 1,018,181
Interest bearing transaction and savings accounts......................... 1,591,333 1,612,294
Certificates of deposit $100,000 and over................................. 524,039 505,303
Other time deposits....................................................... 1,550,775 1,494,763
-------------- --------------
Total deposits........................................................... 4,593,125 4,630,541
Short-term borrowings..................................................... 185,558 235,378
Other liabilities and deferred income taxes............................... 63,029 55,592
Long-term debt............................................................ 6,097 7,170
-------------- --------------
Total liabilities........................................................ 4,847,809 4,928,681
Stockholders' equity
Preferred stock, $1 par value, 400,000 shares authorized, none issued.... -- --
Common stock, $3 par value, 50,000,000 shares authorized,
28,757,479 and 28,709,207 shares issued, respectively................... 82,168 82,030
Capital surplus.......................................................... 195,337 195,019
Retained earnings........................................................ 186,941 154,356
Unrealized net gains (losses) on available-for-sale securities,
net of income tax....................................................... (1,582) 854
Less treasury stock at cost, 210,531 and 0 shares, respectively ......... (6,119) --
-------------- --------------
Total stockholders' equity.............................................. 456,745 432,259
-------------- --------------
Total liabilities and stockholders' equity............................. $ 5,304,554 $ 5,360,940
============== ==============
See accompanying notes.
3
FIRST COMMERCIAL CORPORATION Unaudited Unaudited
CONSOLIDATED INCOME STATEMENTS Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Interest income
Loans and leases, including fees........................... $ 72,770 $ 63,476 $ 215,587 $ 178,139
Short-term investments..................................... 1,763 995 4,788 3,177
Investment securities-taxable.............................. 17,228 15,541 51,576 47,115
-nontaxable........................... 2,114 1,827 6,150 5,588
Trading account securities................................. 10 5 11 5
---------- ---------- ---------- ----------
Total interest income.................................... 93,885 81,844 278,112 234,024
Interest expense
Interest on deposits....................................... 37,129 32,320 110,996 91,492
Short-term borrowings...................................... 2,041 2,579 6,463 7,750
Long-term debt............................................. 96 210 316 624
---------- ---------- ---------- ----------
Total interest expense................................... 39,266 35,109 117,775 99,866
Net interest income........................................... 54,619 46,735 160,337 134,158
Provision for possible loan and lease losses.................. 1,746 481 4,871 1,740
---------- ---------- ---------- ----------
Net int inc after prov for possible loan and lease losses 52,873 46,254 155,466 132,418
Other income
Trust department income.................................... 2,887 2,739 8,929 8,172
Mortgage servicing fee income.............................. 9,827 5,092 31,627 12,590
Broker-dealer operations income............................ 1,029 825 2,913 2,204
Service charges on deposit accounts........................ 6,526 5,499 18,695 16,289
Other service charges and fees............................. 3,158 2,459 9,225 6,488
Investment securities gains (losses), net.................. (72) (42) 18 (47)
Other real estate gains (losses), net...................... (173) (59) (490) (164)
Other...................................................... 2,052 1,407 5,735 3,857
---------- ---------- ---------- ----------
Total other income....................................... 25,234 17,920 76,652 49,389
Other expenses
Salaries, wages and employee benefits...................... 23,591 19,821 71,224 59,114
Net occupancy.............................................. 3,259 2,900 9,377 8,321
Equipment.................................................. 3,331 2,703 9,581 7,866
FDIC insurance............................................. 610 2,189 1,145 6,702
Amortization of mortgage servicing rights.................. 4,958 1,037 15,122 3,111
Other...................................................... 15,816 12,936 48,877 34,488
---------- ---------- ---------- ----------
Total other expenses..................................... 51,565 41,586 155,326 119,602
Income before income taxes................................. 26,542 22,588 76,792 62,205
Income tax provision....................................... 9,330 7,761 26,997 20,961
---------- ---------- ---------- ----------
Net income............................................... $ 17,212 $ 14,827 $ 49,795 $ 41,244
========== ========== ========== ==========
Weighted average number of common shares outstanding
during the period............................................ 28,579,673 27,389,082 28,665,740 27,427,715
Earnings per common share..................................... $ 0.60 $ 0.54 $ 1.74 $ 1.51
See accompanying notes.
4
FIRST COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Unrealized
Preferred Common Retained Gains and Treasury
Stock Stock Surplus Earnings (Losses) Stock Total
--------- --------- --------- --------- --------- --------- ---------
Balance - January 1, 1995.............. $ -- $ 71,325 $ 109,167 $ 170,132 $ (7,433)$ -- $ 343,191
Change in unrealized gains (losses),
net of income taxes of $4,084........ 7,603 7,603
Net income............................ 41,244 41,244
Cash dividends - $.53 per common share (14,609) (14,609)
Stock options exercised............... 125 272 397
Common stock issued, 2,873 shares..... 8 54 62
Purchase of treasury stock,
88,757 shares........................ (2,015) (2,015)
Acquisition of equity interest of
West-Ark Bancshares, Inc.,
723,561 shares....................... 1,932 380 5,421 (260) 7,473
--------- --------- --------- --------- --------- --------- ---------
Balance - September 30, 1995........... $ -- $ 73,390 $ 109,873 $ 202,188 $ (90)$ (2,015)$ 383,346
========= ========= ========= ========= ========= ========= =========
Balance - January 1, 1996.............. $ -- $ 82,030 $ 195,019 $ 154,356 $ 854 $ -- $ 432,259
Change in unrealized gains (losses),
net of income taxes of $1,391........ (2,436) (2,436)
Net income............................ 49,795 49,795
Cash dividends - $.60 per common share (17,210) (17,210)
Stock options exercised............... 138 305 6 449
Purchase of treasury stock,
210,531 shares....................... (6,369) (6,369)
Sale of treasury stock,
7,350 shares. ...................... 214 214
Purchase of minority shares of
Springhill Bank & Trust Company,
1,422 shares......................... 13 30 43
--------- --------- --------- --------- --------- --------- ---------
Balance - September 30, 1996........... $ -- $ 82,168 $ 195,337 $ 186,941 $ (1,582)$ (6,119)$ 456,745
========= ========= ========= ========= ========= ========= =========
See accompanying notes.
5
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(Dollars in thousands) September 30,
-----------------------
1996 1995
---------- ----------
OPERATING ACTIVITIES
Net income......................................................................... $ 49,795 $ 41,244
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 25,709 11,143
Provision for possible loan and lease losses...................................... 4,871 1,740
Loss (gain) on investment securities available-for-sale........................... (18) 47
Gain on sale of equipment......................................................... (20) (61)
Gain on sale of other real estate................................................. (321) (857)
Write downs of other real estate.................................................. 85 44
Equity in undistributed earnings of unconsolidated subsidiary..................... (1,092) (1,336)
Decrease (increase) in trading securities......................................... 142 (305)
Net unrealized gain on trading securities......................................... - (2)
Decrease (increase) in mortgage loans held for resale............................. 93,161 (46,743)
Increase (decrease) in income taxes payable....................................... (8,042) 2,420
Decrease (increase) in interest and other receivables............................. 11 (3,803)
Increase (decrease) in interest payable........................................... (514) 2,718
Increase in accrued expenses...................................................... 14,231 7,266
Increase in prepaid expenses...................................................... (1,903) (1,785)
---------- ----------
Net cash provided by operating activities........................................ 176,095 11,730
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale.................... 44,971 13,069
Proceeds from maturing investment securities available-for-sale.................... 691,005 122,355
Proceeds from maturing investment securities held-to-maturity...................... 308,818 500,325
Purchases of investment securities available-for-sale.............................. (741,312) (70,540)
Purchases of investment securities held-to-maturity................................ (323,815) (414,014)
Purchase of institution, net of funds acquired..................................... 43 5,276
Net increase in loans and leases................................................... (146,635) (230,893)
Capital expenditures............................................................... (8,130) (11,425)
Proceeds from sale of bank premises and equipment.................................. 3,694 1,896
Additions to purchased mortgage servicing rights and other assets.................. (20,504) (55,856)
Proceeds from sales of other real estate........................................... 2,103 2,976
---------- ----------
Net cash used in investing activities............................................. (189,762) (136,831)
(Continued on next page)
6
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Nine Months Ended
(Dollars in thousands) September 30,
-----------------------
1996 1995
---------- ----------
FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts, and savings accounts................ (112,164) (87,630)
Net increase in time deposits...................................................... 74,748 158,419
Net increase (decrease) in short-term borrowings................................... (49,820) 92,046
Repayment of long-term debt........................................................ (1,073) (1,072)
Proceeds from issuance of common stock............................................. -- 62
Purchase of treasury stock......................................................... (6,369) (2,015)
Sale of treasury stock............................................................. 214 -
Stock options exercised............................................................ 449 397
Cash dividends paid on common stock................................................ (17,210) (14,609)
---------- ----------
Net cash provided by (used in) financing activities............................... (111,225) 145,598
Net increase (decrease) in cash and cash equivalents............................... (124,892) 20,497
Cash and cash equivalents at the beginning of year................................. 540,298 359,355
---------- ----------
Cash and cash equivalents at end of period........................................ $ 415,406 $ 379,852
========== ==========
See accompanying notes.
7
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. There have been no significant changes in the accounting policies of the
Company since December 31, 1995, the date of the most recent annual report
to shareholders, nor have there occurred events, except as disclosed in
Notes 4, 5 and 6, which have had a material impact on the disclosures
contained therein.
2. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position as of September 30, 1996, and the results of operations
and changes in cash flows for the nine months then ended. Any adjustments
consist only of normal recurring accruals.
3. Cash payments for interest were approximately $118.3 million and $97.1
million for the first nine months of 1996 and 1995, respectively. Cash
payments for income taxes during the first nine months of 1996 and 1995 were
approximately $32.4 million and $16.8 million, respectively.
4. Aearth Development, Inc. v. First Commercial Bank, N.A.
-------------------------------------------------------
First Commercial Bank, N.A., a wholly owned subsidiary of the Company, is
the defendant in litigation initiated in 1989 seeking approximately
$200,000,000 in compensatory damages plus punitive damages. Plaintiffs in
the litigation allege fraudulent conspiracy, fraudulent misrepresentation,
tortious interference with a business expectancy, breach of contract,
willful breach of fiduciary duty, interference with performance of contract,
securities law violations, conversion, prima facie tort and violations of
the Federal Racketeer Influenced and Corrupt Organizations Act as a basis
for treble damages. In June of 1991, the matter was tried before a chancery
judge in Chancery Court in Pulaski County, Arkansas, and on June 5, 1992,
the complaint was dismissed and no damages were assessed against First
Commercial Bank, N.A. Plaintiffs appealed this decision to the Supreme
Court of Arkansas in July of 1992, alleging error for failure to try the
case before a jury in Circuit Court. On July 18, 1994, the Supreme Court of
Arkansas remanded the case to Circuit Court in Pulaski County, Arkansas, for
jury trial. A jury trial was held, which concluded March 13, 1996, with the
jury awarding plaintiffs a total of $12.5 million compensatory damages and
$10.0 million punitive damages. On April 30, 1996, the trial court in the
case approved a $7.3 million set off to the March 13, 1996, $22.5 million
jury verdict. The set off pertains to monies owed by Aearth Development,
Inc., and related interests, to First Commercial Bank, N.A. On June 21,
1996, the trial court reduced punitive damages by $7 million. The net jury
verdict has thus been reduced to $8.2 million. First Commercial Bank, N.A.,
has filed an appeal of the final judgment seeking to further reduce or
reverse the judgment. The ultimate legal and financial liability of the
Company in connection with this matter cannot be estimated with certainty,
but management, based on the advice of legal counsel that the judgment
will be reversed and dismissed in whole or in part or a new trial ordered in
whole or in part, believes that the impact of this matter will not have a
materially adverse effect on the Company's financial position. However, if
any substantial loss were to occur as a result of this litigation it could
have a material adverse impact upon results of operations in the fiscal
quarter or year in which it were to be incurred, but the Company cannot
estimate the range of any reasonably possible loss.
8
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
5. In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which addresses the accounting for the impairment of long-lived assets,
such as bank premises and equipment, identifiable intangibles and goodwill
related to those assets. As required under Statement 121, the Company has
adopted the provisions of the new standard as of January 1, 1996, and in
accordance with Statement 121, prior period financial statements have not
been restated to reflect the change in accounting principle. The effect of
adopting this new standard was not material to the Company's financial
position or results of operations.
6. In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 ("Statement 122"), "Accounting for
Mortgage Servicing Rights - an Amendment to FAS 65," to eliminate the
accounting inconsistencies that have existed between mortgage servicing
rights that are acquired through loan origination activities and those
acquired through purchase transactions. As required under Statement 122, the
Company has adopted the provisions of the new standard as of January 1,
1996, and in accordance with Statement 122, prior period financial
statements have not been restated to reflect the change in accounting
principle. The adoption increased the first nine months of 1996's results
of operations $1.6 million.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
First Commercial Corporation ("Registrant" or the "Company") is a multi-
bank holding company headquartered in Little Rock, Arkansas. The Company
operates fifteen institutions in the state of Arkansas, seven institutions in
the state of Texas, one institution in the state of Tennessee, and one
institution in the state of Louisiana. In a joint venture with Arvest Bank
Group, Inc., of Bentonville, Arkansas, the Company owns 50% of an institution
in Norman, Oklahoma. The Company's consolidated assets at September 30, 1996,
totaled approximately $5.3 billion.
On January 9, 1996, a subsidiary of the Company, First Commercial Mortgage
Company, completed the purchase of servicing rights and other assets from the
former Bailey Mortgage Company (BMC) located in Jackson, Mississippi. The sale
of servicing rights and other assets of BMC was conducted by the Resolution
Trust Corporation (RTC), which had assumed ownership of BMC three years ago.
Under terms of the agreement, First Commercial Mortgage Company acquired
approximately $850 million in loan servicing rights and certain other assets
from the RTC, represented by over 30,000 mortgages held on properties
throughout the United States. Following the closure of the sale, the Jackson,
Mississippi, production facility reopened under the name First Commercial
Mortgage Company. The transaction brought First Commercial Mortgage Company's
total servicing portfolio to over $8 billion and 160,000 loans.
On May 9, 1996, the Company entered into a definitive agreement for the
purchase of City National Bank. City National Bank is located in Whitehouse,
Texas, and serves the Tyler and Whitehouse markets of East Texas through five
locations. City National Bank has assets of $40 million, loans of $30 million
and deposits of $37 million. The Company will issue approximately 183,217
shares of the Company's common stock for all the outstanding shares of City
National Bank. The Company anticipates completion of this acquisition in the
first quarter of 1997, at which time City National Bank will be merged with
Tyler Bank and Trust Company, N.A., Tyler, Texas, a subsidiary of the Company.
On June 28, 1996, the Company entered into a definitive agreement for the
purchase of Security National Bank. Security National Bank is located in
Nacogdoches, Texas, and serves the Nacogdoches market of East Texas. Security
National Bank has assets of $39 million, loans of $17 million and deposits of
$35 million. The Company will issue 253,230 shares of the Company's common
stock for all the outstanding shares of Security National Bank. The Company
anticipates completion of this acquisition in the fourth quarter of 1996, at
which time Security National Bank will be merged with Stone Fort National Bank,
Nacogdoches, Texas, a subsidiary of the Company.
On July 26, 1996, First Commercial Investments, Inc., a second-tier
subsidiary of the Company, completed a merger with Ahart & Bryan, Inc., an
institutional broker-dealer based in North Little Rock, Arkansas. The
transaction should add approximately $1 million annually to the Company's
revenue from this line of business. The transaction is not expected to have a
material impact on the Company's earnings per share.
10
On October 3, 1996, the Company entered into a definitive agreement for the
purchase of W.B.T. Holding Company and its wholly owned subsidiary, United
American Bank. United American Bank serves the Memphis, Tennessee, market
through six branch and six ATM locations. United American Bank has assets of
$267 million, loans of $177 million and deposits of $244 million. The Company
will issue approximately 1.3 million shares of the Company's common stock,
subject to adjustment for non-bank assets and liabilities of the holding
company, for all the outstanding shares of W.B.T. Holding Company. The Company
anticipates completion of this acquisition in the first quarter of 1997, at
which time United American Bank will be merged with First Commercial Bank of
Memphis, N.A., Memphis, Tennessee, a subsidiary of the Company.
On October 15, 1996, the Company declared a 5% stock dividend, which will
be payable on November 15, 1996, to shareholders of record as of October 31,
1996. All share and per share data in this report have been retroactively
adjusted for this stock dividend. The Company also announced an increase in
the Company's annual cash dividend from 84 cents per share to 96 cents per
share.
Financial Review
- ----------------
The following financial review provides management's analysis of the
consolidated financial condition and results of operations of the Company. As
such, the presentation focuses on those factors that have had the most
significant impact on the Company's financial condition during the periods
discussed.
Consolidated Earnings Summary
Earnings of $0.60 per share in 1996's third quarter represented an increase
of 11% from $0.54 per share during the same period in 1995. Net income for the
three months ended September 30, 1996, was $17.2 million, up 16% from $14.8
million in 1995. Earnings of $1.74 per share in 1996's first nine months
represented an increase of 15% from $1.51 per share during the same period in
1995. Net income for the nine months ended September 30, 1996, was $50.0
million, up 21% from $41.2 million in 1995. The increase in net income was
primarily due to higher net interest margins, which was caused by loan growth
and repricing. The Company also experienced a substantial increase in mortgage
servicing income from acquisitions during 1995 and early 1996. During the
third quarter of 1996, the Company recorded data processing conversion expenses
of $675 thousand, or $0.01 per share after-tax. A detailed explanation of
these increases is included in the Net Interest Income, Non-Interest Income and
Non-Interest Expense sections of the Financial Review.
When evaluating the earnings performance of a banking organization, two
profitability ratios are important standards of measurement: return on average
assets and return on average common stockholders' equity. Return on average
assets measures net income in relation to total average assets and portrays the
organization's ability to profitably employ its resources. Annualized returns
on average assets for the first nine months of 1996 and 1995 were 1.28% and
1.22%, respectively. Excluding non-recurring expenses related to litigation
and data processing conversions, return on average assets for the first nine
months of 1996 was 1.33%.
11
The second profitability ratio, return on average common stockholders'
equity, indicates how effectively a company has been able to generate earnings
on the capital invested by its stockholders. In the first nine months of 1996,
the Company earned 14.82% on average common stockholders' equity compared with
14.83% for the first nine months of 1995. Excluding non-recurring expenses
related to litigation and data processing conversions, return on average common
stockholders' equity for the first nine months of 1996 was 15.46%. Returns on
average common stockholders' equity for the years 1995, 1994 and 1993 were
15.02%, 14.87% and 14.43%, respectively. The originally reported ratio in
1993, before restatements for pooling acquisitions, was above 15%. The ratio
fell due to the high capital level of State First Financial Corporation, a
pooling-of-interests acquisition that was consummated in March 1994. The
improvement seen in the return on average common stockholders' equity ratio is
indicative of the Company's successful deployment of this capital, combined
with strong earnings growth. Management will continue to work to profitably
deploy excess capital thereby improving return on average common stockholders'
equity.
Net Interest Income
Net interest income, the greatest component of a bank's earnings, is the
difference between income generated by earning assets and the interest cost of
funding those assets. For the purpose of this analysis and discussion, net
interest income and net interest margin reflect income from tax-exempt loans
and tax-exempt investments on a fully tax-equivalent basis. This permits
comparability of income data through recognition of the tax savings realized on
tax-exempt earnings. On a tax-equivalent basis, net interest income was $163.0
million in the first nine months of 1996 compared to $136.7 million in the
first nine months of 1995. Net interest margin is the ratio of net interest
income to average earning assets. This ratio indicates the Company's ability
to manage its earning assets and to control the spread between yields earned on
assets and rates paid on liabilities. Fully tax-equivalent net interest margin
was 4.66% for the first nine months of 1996, compared to 4.47% for the same
period in 1995. The increase in net interest income and net interest margin
resulted from a general repricing of the loan portfolio combined with a 17%
growth in average loans and leases between 1995 and 1996. The loan growth was
due to internal growth (10%), the acquisition of FDH Bancshares, Inc., in the
fourth quarter of 1995, which was accounted for as a purchase transaction (5%),
and the increase in mortgage production volume experienced by the Company's
mortgage subsidiary (2%).
Management of net interest income and net interest margin is actively
pursued through a continuing emphasis on pricing both loans and deposits with
focus on profitability, rather than a narrow emphasis on local market
conditions. Presented in the following table is an analysis of the components
of fully tax-equivalent net interest income for the three months and nine
months ended September 30, 1996 and 1995.
12
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) ----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Interest income.......................................... $ 93,885 $ 81,844 $ 278,112 $ 234,024
Fully tax-equivalent adjustment.......................... 916 838 2,644 2,551
---------- ---------- ---------- ----------
Interest income - FTE.................................... 94,801 82,682 280,756 236,575
Interest expense......................................... 39,266 35,109 117,775 99,866
---------- ---------- ---------- ----------
Net interest income - FTE $ 55,535 $ 47,573 $ 162,981 $ 136,709
========== ========== ========== ==========
Yield on earning assets - FTE............................ 8.00% 7.94% 8.03% 7.74%
Cost of interest bearing liabilities ................... 4.07% 4.15% 4.13% 4.01%
Net interest spread - FTE................................ 3.93% 3.79% 3.90% 3.73%
Net interest margin - FTE................................ 4.69% 4.57% 4.66% 4.47%
The following schedule details rate sensitive assets and liabilities at
September 30, 1996. The repricing schedule, as depicted, represents the first
opportunity to reprice earning assets or interest bearing liabilities. The
interest rate sensitivity data is based on repricing terms, rather than actual
contractual maturities.
13
Interest Rate Sensitivity Period
(Dollars in thousands) ----------------------------------------------------------------------------
0 - 30 31 - 90 91 - 180 181 - 365 1 to 5 Over 5
Days Days Days Days Years Years Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earning assets:
Short-term investments..........$ 85,327 $ -- $ -- $ -- $ -- $ -- $ 85,327
Trading account securities...... 307 -- -- -- -- -- 307
Taxable investment securities... 162,095 120,257 174,819 172,388 517,326 29,159 1,176,044
Tax-exempt investment securities 1,813 4,782 11,164 9,306 88,704 49,255 165,024
Loans and leases................ 750,529 260,108 312,926 556,454 1,105,490 277,760 3,263,267
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total earning assets............ 1,000,071 385,147 498,909 738,148 1,711,520 356,174 4,689,969
Interest bearing liabilities:
Savings and NOW accounts........ 996,433 -- -- -- -- -- 996,433
Money market accounts........... 594,900 -- -- -- -- -- 594,900
Other time deposits............. 259,228 399,882 552,601 469,863 378,447 14,793 2,074,814
Short-term borrowings........... 185,558 -- -- -- -- -- 185,558
Long-term debt.................. -- -- -- 1,074 6 5,017 6,097
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities.................... 2,036,119 399,882 552,601 470,937 378,453 19,810 3,857,802
Interest rate
sensitivity gap................(1,036,048) (14,735) (53,692) 267,211 1,333,067 336,364
Cumulative interest rate
sensitivity gap................(1,036,048)(1,050,783)(1,104,475) (837,264) 495,803 832,167
Cumulative rate sensitive assets
to rate sensitive liabilities.. 49.1% 56.9% 63.0% 75.8% 112.9% 121.6%
Cumulative gap as a percentage
of earning assets.............. (22.1%) (22.4%) (23.5%) (17.9%) 10.6% 17.7%
The Company is currently in a negative static gap situation. However,
management recognizes the limitations of a static gap analysis. While a
comparison of rate sensitive assets and rate sensitive liabilities (static gap
analysis) does provide a general indication of how net interest income will be
affected by changes in interest rates, an important limitation is that static
gap analysis considers only the dollar volume of assets and liabilities to be
repriced. Changes in net interest income are determined not only by the
volumes being repriced, but also by the rates at which the assets and
liabilities are repriced, and the relationship between the rates earned on
assets and rates paid on liabilities are not necessarily constant over time.
Therefore, management uses a beta adjusted gap along with a net interest
revenue simulation model to actively manage the gap position. Management
believes that the dynamic gap position is in a near balanced situation, so that
the impact of changes in the general level of interest rates on net interest
margin is likely to be minimal. Management will continue to closely monitor
all aspects of the Company's gap position to maximize profitability as interest
rates fluctuate.
14
Non-Interest Income
In addition to net interest income increases, the Company has continued to
develop its sources of non-interest income. The primary sources of sustainable
non-interest income are trust services, service charges on deposit accounts,
mortgage services and broker-dealer operations. For the first nine months of
1996, non-interest income totaled $76.7 million compared to $49.4 million for
the first nine months of 1995. Excluding the other real estate and investment
securities gains and losses during the first nine months of 1996 and 1995, non-
interest income increased $27.5 million or 55%. The primary contributor to
this increase was $19.0 million in increased mortgage servicing income due to
mortgage servicing acquisitions in 1995 and early 1996. The Company also
experienced increased fee income from the 1995 purchase of consumer credit card
loan participations from its 50% owned affiliate bank in Norman, Oklahoma.
Increased activity in the Company's trust and broker-dealer operations further
contributed to the increase in non-interest income. The following table
summarizes non-interest income for the three months and nine months ended
September 30, 1996 and 1995.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) ------------------------------------ ------------------------------------
1996 1995 % Change 1996 1995 % Change
---------- ---------- ----------- ---------- ---------- -----------
Trust department income.......... $ 2,887 $ 2,739 5.40% $ 8,929 $ 8,172 9.26%
Mortgage servicing fee income.... 9,827 5,092 92.99 31,627 12,590 151.21
Broker-dealer operations income.. 1,029 825 24.73 2,913 2,204 32.17
Service charges on deposits...... 6,526 5,499 18.68 18,695 16,289 14.77
Other service charges and fees... 3,158 2,459 28.43 9,225 6,488 42.19
Investment securities gains
(losses), net.................. (72) (42) (71.43) 18 (47) 138.30
Other real estate gains
(losses), net.................. (173) (59) (193.22) (490) (164) (198.78)
Other income..................... 2,052 1,407 45.84 5,735 3,857 48.69
---------- ---------- ---------- ----------
Total non-interest income........ 25,234 17,920 40.81% $ 76,652 $ 49,389 55.20%
========== ========== ========== ==========
Non-Interest Expense
Non-interest expenses consist of salaries and benefits, occupancy,
equipment and other expenses such as legal, postage, etc., necessary for the
operation of the Company. Management is committed to controlling the level of
non-interest expenses through improved efficiency and consolidation of certain
activities to achieve economies of scale. It is expected that these efforts
will further improve the Company's efficiency ratio during the remainder of
1996 and future years.
15
Non-interest expenses were $155.3 million for the first nine months of 1996
compared to $119.6 million for the first nine months of 1995. In the first
nine months of 1996, the Company recorded $3.6 million in non-recurring
expenses relating to litigation and data processing conversions. Of the
remaining $32.1 million increase, amortization of mortgage servicing rights
contributed $12.0 million. This increase was due to mortgage servicing
acquisitions in 1995 and early 1996, mentioned previously. Non-interest
expense of $6.4 million was attributed to FDH Bancshares, Inc., which was
acquired in the fourth quarter of 1995. The Company also experienced increased
expenses from the 1995 purchase of consumer credit card loan participations
mentioned previously. Excluding the effect of the 1995 bank and mortgage
servicing acquisitions and the non-recurring expense accruals, non-interest
expense increased $4.5 million, which represents an increase from 1995's first
nine months of 4%. The following table summarizes non-interest expenses for
the three months and nine months ended September 30, 1996 and 1995.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) ------------------------------------ ------------------------------------
1996 1995 % Change 1996 1995 % Change
---------- ---------- ----------- ---------- ---------- -----------
Salaries, wages and
employee benefits.............. $ 23,591 $ 19,821 19.02% $ 71,224 $ 59,114 20.49%
Net occupancy.................... 3,259 2,900 12.38 9,377 8,321 12.69
Equipment........................ 3,331 2,703 23.23 9,581 7,866 21.80
FDIC Insurance................... 610 2,189 (72.13) 1,145 6,702 (82.92)
Amortization of mortgage servicing
rights......................... 4,958 1,037 378.11 15,122 3,111 386.08
Other expenses................... 15,816 12,936 22.26 48,877 34,488 41.72
---------- ---------- ---------- ----------
Total non-interest expenses...... $ 51,565 $ 41,586 24.00 $ 155,326 $ 119,602 29.87%
========== ========== ========== ==========
An important tool in determining a bank's effectiveness in managing non-
interest expenses is the efficiency ratio, which is calculated by dividing non-
interest expense by the sum of net interest margin on a tax-equivalent basis
and non-interest income, excluding securities gains and losses. The Company's
ratio decreased from 61.29% for the first nine months of 1995 to 55.86% in the
first nine months of 1996. The Company, in calculating its efficiency ratio
has excluded the effect of the non-recurring expenses, mentioned previously, as
well as the amortization of intangible assets. The decrease in the efficiency
ratio shows the Company's commitment to controlling non-interest expenses while
increasing revenues. The 1996 efficiency ratio reached the Company's long-term
goal of 57%. Management has reviewed trends in the financial services industry
and set a new efficiency ratio goal of 54%.
Income Taxes
The effective income tax rate differs from the statutory rate primarily
because of tax-exempt income from loans, leases and municipal securities. The
effective tax rate was 35.2% for the first nine months of 1996 and 33.7% for
the first nine months of 1995. The increase in the effective income tax rate
for 1996 was due to a decrease in income on tax-exempt investments as a
percentage of total income before income taxes.
16
Loan and Lease Portfolio
At September 30, 1996, the Company's loan and lease portfolio, net of
unearned income, totaled $3.3 billion, as compared to a $3.2 billion loan
portfolio at December 31, 1995. Excluding the Company's mortgage loans held
for resale, which decreased $92.3 million, the Company's loan and lease
portfolio experienced an increase of $140.1 million, or 5%, during the first
nine months of 1996. Although the growth in loans was spread through all
categories, the strongest growth occurred in the commercial, consumer, and real
estate portfolios.
The Company has continued its policy of conservative lending thereby
avoiding significant risk areas, such as out of territory lending and highly
leveraged transactions ("leveraged buy-outs"). This has been and will remain
the philosophy of Company management. In keeping with this philosophy, the
Company has no foreign loans, no loans outstanding to borrowers engaged in
highly leveraged transactions, and no concentrations of credit to borrowers in
any one industry. A concentration generally exists when more than 10% of total
loans are outstanding to borrowers in the same industry.
Provision and Allowance for Possible Loan and Lease Losses
The allowance for possible loan and lease losses is the amount deemed by
management to be adequate to provide for possible losses on loans and leases
that may become uncollectible. Reviews of general loss experience and the
performance of specific credits are conducted in determining reserve adequacy
and required provision expense. The allowance is adjusted by the provision for
possible loan and lease losses, increased by loan recoveries and decreased by
loan losses. As of September 30, 1996, the allowance for possible loan and
lease losses equaled $52.1 million or 1.60% of total loans and leases.
Comparatively, the allowance possible for loan and lease losses amounted to
$51.3 million or 1.60% of total loans and leases at December 31, 1995. The
provision for possible loan and lease losses amounted to $4.9 million in the
first nine months of 1996 as compared to $1.7 million in the first nine months
of 1995.
A key indicator of the adequacy of the allowance for possible loan and
lease losses is the ratio of the allowance to non-performing loans. The
Company's ratio has been at or above 100% for the past six years. At September
30, 1996, the Company's ratio was 232.25%. This means that for every dollar of
non-performing loans (impaired loans, other non-accrual loans, loans 90 days or
more past due, and renegotiated loans), $2.32 has been set aside in the
Company's reserves to cover possible losses. The ratio at December 31, 1995,
was 294.42%. Another reserve adequacy indicator is the ratio of allowance for
possible loan and lease losses and other real estate losses to non-performing
assets (defined as impaired loans, other non-accrual loans, renegotiated debt,
repossessed assets and other real estate owned). The ratio was 275.62% at
September 30, 1996, compared to 376.30% at December 31, 1995. Although non-
performing loans and assets have increased from the unsustainably low levels
reported in 1995, the Company's asset quality remains strong. Presented in the
following table is a comparison of net loan and lease losses sustained to
average loans and leases, allowance for possible loan and lease losses to total
loans and leases, and non-performing loans to total loans and leases.
17
Annualized Nine Months
Ended September 30, For the Years Ended December 31,
----------------------- --------------------------------------------
1996 1995 1994 1993 1992 1991
----------------------- -------- -------- -------- -------- --------
Net loan and lease losses sustained
to average loans and leases 0.17% 0.08% 0.04% 0.16% 0.52% 0.42%
Allowance for possible loan and lease
losses to total loans and leases 1.60% 1.60% 1.79% 2.19% 2.15% 2.25%
Non-performing loans to total
loans and leases 0.69% 0.54% 0.52% 0.72% 0.86% 1.61%
Although asset quality has improved during the periods reflected in the
preceding table, the principal area of risk for the Company will continue to be
in the real estate loan portion of the portfolio, and accordingly, this area
has the largest allocation of the reserve for loan and lease losses.
Management attempts to control the loan loss risks by maintaining a diverse
portfolio with no significant concentrations in any industry or category of
borrowers and through a very aggressive real estate write down policy. Also,
the Company maintains a corporate "in-house-lending limit" that represents only
26% of the Company's combined legal lending limit. Any exception to this limit
must be approved by a corporate credit group prior to commitment or funding.
The Company currently has only 32 loan relationships with aggregate outstanding
balances of $5 million or greater, which further mitigates the loan loss risks.
Liquidity
Long-term liquidity is a function of a large core deposit base and a strong
capital position. Core deposits, which consist of total deposits less
certificates of deposit of $100,000 and over, represent the Company's largest
and most important funding source. Average total core deposits, excluding the
FDH Bancshares, Inc., acquisition in November 1995, remained relatively stable
during the first nine months of 1996. The capital position of the Company is a
result of internal generation of capital through earnings retention. The
Company manages dividends to retain sufficient capital for long-term liquidity
and growth. Two key measures of the Company's long-term liquidity are the
ratios of loans and leases to total deposits and loans and leases to core
deposits. Lower ratios in these two measures correlate to higher liquidity.
As can be seen from the accompanying table, the Company's liquidity ratios have
increased, indicating lower liquidity. The Company's liquidity has decreased
because the funding of loans has outpaced the growth in the Company's core
deposit base. However, the Company's relatively sound deposit base, along with
its low debt level and common and preferred stock availability, provide several
alternatives for future financing and long-term liquidity needs.
18
For the Nine Months
Ended September 30, For the Years Ended December 31,
-------------------- ------------------------------------
1996 1995 1994 1993
-------------------- ---------- ---------- ----------
Average loans and leases to average deposits....... 70.63% 69.29% 61.76% 59.41%
Average loans and leases to average core deposits.. 79.39% 76.88% 67.83% 64.20%
Short-term liquidity is the ability of the Company to meet the borrowing
needs and deposit withdrawal requirements of its customers due to growth in the
customer base and, to a lesser extent, seasonal and cyclical customer demands.
Short-term liquidity needs can be met by short-term borrowings in state and
national money markets. Short-term borrowings include federal funds purchased,
securities sold under agreement to repurchase, treasury tax and loan accounts,
and other borrowings. Average short-term borrowings exceeded average short-
term investments by $45.5 million in the first nine months of 1996. During the
fourth quarter of 1995 average short-term borrowings exceeded average short-
term investments by $86.1 million. The Company has continued to use short-term
borrowings to fund overall loan growth throughout the Company. Future short-
term liquidity needs for daily operations are not expected to vary
significantly and management believes that the Company's level of liquidity is
sufficient to meet current funding requirements.
Capitalization
Capital adequacy continues to hold a position of great importance when
evaluating financial services providers. The Company maintains its goal of
providing a strong capital position while earning an acceptable return for its
shareholders. Management will use the additional financial leverage provided
by internal generation of capital and recent acquisitions in pursuit of above
average return opportunities. A position of strength is important to the
Company's customers, investors and regulators.
At September 30, 1996, the Company's equity to asset ratio was 8.61%
compared to 8.06% at December 31, 1995. At September 30, 1996, the Company's
tier 1 leverage, tier 1 risk-based capital and total risk-based capital ratios
substantially exceeded the required 3%, 4% and 8% levels established by the
Board of Governors of the Federal Reserve System, as can be seen from the
accompanying table.
Regulatory September 30, June 30, March 31, December 31, September 30,
Minimum 1996 1996 1996 1995 1995
----------- ------------ ------------ ------------ ------------ ------------
Tier 1 leverage ratio........... 3.00% 7.96% 7.86% 7.64% 7.96% 7.80%
Tier 1 risk-based capital ratio. 4.00% 11.53% 11.50% 11.33% 10.55% 11.56%
Total risk-based capital ratio.. 8.00% 12.32% 12.29% 12.13% 11.38% 12.33%
19
While management plans to maintain the Company's strong capital base, it
recognizes the need to effectively manage capital levels as they relate to
asset growth. In order to avoid declining return on equity ratios caused by a
more rapid rate of growth in capital than in assets, management will continue
to evaluate options to utilize excess capital thereby improving return on
equity.
The Company is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, are reasonably likely to have a
material effect on the Company's liquidity, capital resources or operations.
Dividend Policy
The Company's long-term dividend policy has been to pay between 30% and 35%
of earnings in cash dividends to its stockholders while maintaining adequate
capital to support growth. In October 1996, the Company increased its dividend
rate for the tenth consecutive year, bringing the annual dividend rate to $.96
per share. The dividend payout ratio target was also increased to between 35%
and 40% of earnings, as a result of continued growth in capital ratios and
strong earnings levels.
The dividend payout ratios for the past three years were 35.77% in 1995,
33.97% in 1994, and 29.98% in 1993. The Company's Board of Directors reviews
the cash dividend policy and payout levels annually in the fourth quarter.
20
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the third
quarter of 1996.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMERCIAL CORPORATION
/s/ J. Lynn Wright
By: -------------------------------
J. Lynn Wright
Chief Financial Officer
Date: November 13, 1996
22
Index to Exhibits
Exhibit Number Exhibit
---------------- --------------------------------------------
27 Financial Data Schedule.